On March 30, 2005, NASD filed for immediate effectiveness with
the Securities and Exchange Commission (SEC) amendments to Rule
2860increasing, for a pilot period, certain stock options position
and exercise limits and adding permanently reverse collars to the
enumerated strategies set forth in the equity option hedge
exemptions.

The rules, as amended, are set forth in Attachment A. The
amendments became effective March 30, 2005.

Questions/Further Information

Questions concerning this Notice may be directed to Gary L.
Goldsholle, Associate Vice President and Associate General Counsel,
Office of General Counsel (OGC), Regulatory Policy and Oversight
(RPO), at (202) 728-8104; or James L. Eastman, Assistant General
Counsel, OGC, RPO, at (202) 728-6961

Background and Discussion

NASD Rule 2860(b)(3)(A) imposes a ceiling or position limit on the number of
conventional and standardized equity options contracts in each class on the same side
of the market (i.e., aggregating long calls and short puts or long puts and short calls)
that can be held or written by a member, a person associated with a member, a
customer, or a group of customers acting in concert.1 The rule provides that the position
limits for equity options are determined according to a five-tiered system in which
more actively traded stocks with larger public floats are subject to higher position
limits.

NASD recently adopted amendments to its options position limits tiers to match
changes approved by the SEC or adopted by other self-regulatory organizations (SROs)
with options rules.2 Pursuant to a pilot program that began March 30, 2005, and ends
September 2, 2005 (Pilot Period), unless extended, the limits for each of the tiers
has increased as follows: 1) 13,500 contracts has been increased to 25,000 contracts;
2) 22,500 contracts has been increased to 50,000 contracts; 3) 31,500 contracts has
been increased to 75,000 contracts; 4) 60,000 contracts has been increased to 200,000
contracts; and 5) 75,000 contracts has been increased to 250,000 contracts. These tiers
apply to both conventional and standardized options. Options exercise limits, which are
set forth in Rule 2860(b)(4), and which incorporate by reference the position limits in
Rule 2860(b)(3), also have been increased during the Pilot Period.

Rule 2860(b)(3)(A)(vii) contains the equity option hedge exemptions and allows certain
hedged positions to exceed the base limits set forth in the five tiers. Options positions
hedged pursuant to one of the qualified equity option hedge strategies are exempt
from position limits for standardized options, and subject to position limits of five
times the standardized limits for conventional options. At the time the position limits
for each of the five tiers were increased, the SEC also approved (or SROs adopted)
amendments expanding the available strategies under the equity option hedge
exemptions to include "reverse collars."3 NASD has made a conforming change to its
equity option hedge exemptions. The equity option hedge exemption for a reverse
collar applies to a long call position accompanied by a short put position where the
long call expires with the short put and the strike price of the long call equals or
exceeds the short put and where each long call and short put position is hedged with
100 shares of the underlying security (or other adjusted number of shares). Neither side
of the long call, short put position can be in-the-money at the time the position is
established. The addition of the reverse collar hedging strategy as part of the equity
option hedge exemptions is permanent and is not part of the pilot program.

1 A "standardized equity option" is an equity
options contract issued, or subject to issuance
by, The Options Clearing Corporation that is not
a FLEX Equity Option (NASD Rule
2860(b)(2)(VV)). A "conventional option" is an
option contract not issued, or subject to
issuance by, The Options Clearing Corporation
(NASD Rule 2860(b)(2)(N)). NASD's limits on
standardized equity options are applicable only
to those members that are not also members of
the exchange on which the option is traded; the
limits on conventional options are applicable to
all NASD members (NASD Rule 2860(b)(1)(A)).

(A) Stock Options—Except in highly unusual circumstances, and with the prior written
approval of NASD pursuant to the Rule 9600 Series for good cause shown in each instance, no
member shall effect for any account in which such member has an interest, or for the account of
any partner, officer, director or employee thereof, or for the account of any customer, non-member
broker, or non-member dealer, an opening transaction through Nasdaq, the over-the-counter market
or on any exchange in a stock option contract of any class of stock options if the member has
reason to believe that as a result of such transaction the member or partner, officer, director or
employee thereof, or customer, non-member broker, or non-member dealer, would, acting alone or
in concert with others, directly or indirectly, hold or control or be obligated in respect of an
aggregate equity options position in excess of:

(i) 13,500 (or 25,000 during the pilot period from March 30, 2005, through
September 2, 2005 ("Pilot Period")) option contracts of the put class and the call class on
the same side of the market covering the same underlying security, combining for purposes
of this position limit long positions in put options with short positions in call options, and
short positions in put options with long positions in call options; or

(ii) 22,500 (or 50,000 during the Pilot Period) option contracts of the put class and
the call class on the same side of the market covering the same underlying security,
providing that the 22,500 (or 50,000 during the Pilot Period) contract position limit shall
only be available for option contracts on securities that underlie Nasdaq or exchange-traded
options qualifying under applicable rules for a position limit of 22,500 (or 50,000 during
the Pilot Period) option contracts; or

(iii) 31,500 (or 75,000 during the Pilot Period) option contracts of the put class
and the call class on the same side of the market covering the same underlying security
providing that the 31,500 (or 75,000 during the Pilot Period) contract position limit shall
only be available for option contracts on securities that underlie Nasdaq or exchange-traded
options qualifying under applicable rules for a position limit of 31,500 (or 75,000 during
the Pilot Period) option contracts; or

(iv) 60,000 (or 200,000 during the Pilot Period) option contracts of the put and the
call class on the same side of the market covering the same underlying security, providing
that the 60,000 (or 200,000 during the Pilot Period) contract position limit shall only be
available for option contracts on securities that underlie Nasdaq or exchange-traded options
qualifying under applicable rules for a position limit of 60,000 (or 200,000 during the Pilot
Period) option contracts; or

(v) 75,000 (or 250,000 during the Pilot Period) option contracts of the put and the
call class on the same side of the market covering the same underlying security, providing
that the 75,000 (or 250,000 during the Pilot Period) contract position limit shall only be
available for option contracts on securities that underlie Nasdaq or exchange-traded options
qualifying under applicable rules for a position limit of 75,000 (or 250,000 during the Pilot
Period) option contracts; or

(vi) No Change.

(vii) Equity Option Hedge Exemptions

a. The following qualified hedge strategies and positions described in
subparagraphs 1. through [5] 6. below shall be exempt from the established
position limits under this rule for standardized options. Hedge strategies and
positions described in subparagraphs [6] 7. and [7] 8. below in which one of the
option components consists of a conventional option, shall be subject to a position
limit of five times the established position limits contained in subparagraphs (i)
through (vi) above. Hedge strategies and positions in conventional options as
described in subparagraphs 1. through [5] 6. below shall be subject to a position
limit of five times the established limits contained in subparagraphs (i) through (vi)
above. Options positions limits established under this subparagraph shall be
separate from limits established in other provisions of this rule.

1. through 3. No Change.

4. Reverse Collars — A long call position accompanied by a short put
position where the long call expires with the short put and the strike price of the
long call equals or exceeds the short put and where each long call and short put
position is hedged with 100 shares of the underlying security (or other adjusted
number of shares). Neither side of the long call, short put position can be in-themoney
at the time the position is established.

[4.] 5. Collars — A short call position accompanied by a long put position,
where the short call expires with the long put, and the strike price of the short call
equals or exceeds the strike price of the long put position and where each short
call and long put position is hedged with 100 shares (or other adjusted number
of shares) of the underlying security or securities convertible into such underlying
security. Neither side of the short call/long put position can be in-the-money at
the time the position is established.

[5] 6. Box Spreads — A long call position accompanied by a short put
position with the same strike price and a short call position accompanied by a long
put position with a different strike price.

[6] 7. Back-to-Back Options — A listed option position hedged on a
one-for-one basis with an over-the-counter (OTC) option position on the same
underlying security. The strike price of the listed option position and corresponding
OTC option position must be within one strike price interval of each other and no
more than one expiration month apart.

[7] 8. For reverse conversion, conversion, reverse collar and collar
strategies set forth above in subparagraphs 2., 3., 4. and 5. [4.], one of the
option components can be an OTC option guaranteed or endorsed by the firm
maintaining the proprietary position or carrying the customer account.

b. No Change.

(viii) Conventional Equity Options

a. For purposes of this paragraph (b), standardized equity option contracts of the
put class and call class on the same side of the market overlying the same security shall not
be aggregated with conventional equity option contracts or FLEX Equity Option contracts
overlying the same security on the same side of the market. Conventional equity option
contracts of the put class and call class on the same side of the market overlying the same
security shall be subject to a position limit equal to the greater of:

1. the basic limit of 13,500 (or 25,000 during the Pilot Period) contracts,
or

2. any standardized equity options position limit as set forth in paragraphs
(b)(3)(A)(ii) through (v) for which the underlying security qualifies or would
be able to qualify.

b. In order for a security not subject to standardized equity options trading to
qualify for an options position limit of more than 13,500 (or 25,000 during the Pilot Period)
contracts, a member must first demonstrate to NASD's Market Regulation Department that
the underlying security meets the standards for such higher options position limit and the
initial listing standards for standardized options trading.